Goodheart-Willcox Company ($GWOX) 2019 Annual Report

Earlier this month we published an update on the Goodheart-Willcox Company tender offer (also, previously). With 52k shares being taken off the market, the stock is even less liquid now, and is bid $120 and offered $199 (but the stock hasn't traded since April 30th).

The bad thing about the GWOX tender offers, from an outside shareholder perspective, is that they have been done by the ESOP and not by the company itself. Even worse, the company has loaned the ESOP money at low interest rates to do the buybacks.

These buybacks by the ESOP also make the outstanding share calculations a little wonky. The company had 446,542 shares outstanding as of April 30, 2019, but it likes to use a lower number (410,542) which excludes shares that are in the ESOP but unreleased and held in a suspense account. We think that it makes more economic sense to use the higher share number, especially since dividends on the unreleased ESOP shares go to paying back the loan from the ESOP to the company.

The result is that the market capitalization, based on 446,542 shares, is $53.6 million at the bid and $88.9 million at the offer. The company had $43.75 million of cash and securities at April 30, 2019 against $27.6 million of total liabilities. However, $23.3 million of the liabilities are deferred revenue.

At the recent tender offer price of $150, the market capitalization is $67 million. Using that figure, the enterprise value is therefore somewhere between $27.5 million and $50 million depending on how you treat the deferred revenue in the enterprise value calculation. According to Note C of the financials, the deferred revenue is coming (as you would expect) from the sale of digital online content, which revenue is then recognized over the subscription periods. Given that this revenue should have very high incremental profit margins it seems reasonable to haircut it substantially and derive an enterprise value figure at the low end of the range.

By the way, it is notable that so much of the balance sheet is funded by deferred revenue. This is a company that is actually very capital light and all of its $27.6 million of liabilities seem to be trade liabilities; i.e. non-interest-bearing.

So what do we get for a ballpark of $30 million enterprise value? Here is a snapshot of the relevant metrics:

Fiscal	2019	2018	2017	2016	2015		Total	Average
Net Income	3,564	8,287	1,637	866	1,928		16,282	3,256
D&A	998	941	789	809	822		4,359	872
CapEx	-506	-1,645	-1,035	-722	-557		-4,465	-893
FCF	4,056	7,583	1,391	953	2,193		16,176	3,235
Sales	29,257	41,162	24,151	20,684	22,032		137,286	27,457
NI %	12%	20%	7%	4%	9%		12%
FCF %	14%	18%	6%	5%	10%		12%
Book Equity	36,532	36,328	32,202	31,199	31,095			33,471
ROE	10%	23%	5%	3%	6%			10%

Some things to notice over the past five years: the net income reliably translates into cash flow at an earnings margin of about 12 percent on sales. If you figure that the business has $3 million of annual earnings power, then the stock is not exactly cheap or expensive either. (However: management's projections in the tender offer document have net income growing from $3.2 million in 2020 to $8.4 million in 2024, a total of $30 million over the five year period, which would earn back the entire estimated enterprise value.)

The return on book equity understates the quality of the business because there is so much excess cash on the balance sheet. It actually looks as though an owner could dividend out cash greater the book equity, which would mean the business could operate entirely with free external financing. (It would then have negative book value, and profitable companies with negative book value outperform.)

This is all somewhat academic because (a) the shares are so illiquid now and (b) management is allocating capital more to its benefit than to shareholders'; but it is also instructive. These return on capital and asset figures could hardly be more different than the other business we looked at this week - Scheid Vineyards. There are some quality businesses in the Oddball space; they just rarely come paired with quality managements and good prices.

We believe it is important to study and monitor Oddballs over the market cycle so that you are already familiar with them when big market dislocations happen.

We will have more about this (GWOX and educational publishing) in upcoming Issues of Oddball Stocks Newsletter. Our next Issue (#26) will be out in August. Until then, make sure you see Issue 25 of the Newsletter, and if you are missing any back Issues, you can get them here.